Moscow Exchange Renewal Clouds IPO Appeal to Prosperity

The Kremlin is seen from the offices of the Moscow Exchange in Moscow. Russia is seeking to reform the exchange’s trading systems and open up access to the local market to lure more foreign capital to the country and bolster the lowest stock valuations among 21 emerging markets tracked by Bloomberg. Photographer: Andrey Rudakov/Bloomberg

Feb. 13 (Bloomberg) -- The modernization of the Moscow
Exchange makes forecasting its revenue harder and may deter
foreign investors from buying shares in the bourse, according to
Prosperity Capital Management.

The exchange, Russia’s main equity and fixed-income market
is being marketed to investors in the U.S. and Europe and its
stock will debut in Moscow Feb. 15, according to a statement
last week. The bourse, created out of a merger between competing
exchanges in 2011, is seeking to raise at least 15 billion
rubles ($499 million) in the initial public offering.

“This IPO is more complicated, it’s not so straightforward
as an IPO by some retail chain or a raw materials producer as it
relates to regulations and functionality of the financial
markets,” Mattias Westman, who helps oversee about $4 billion
in Russian assets as chief executive officer of Prosperity
Capital in London, said by phone yesterday. “The Russian market
infrastructure is developing very intensively and that might
make it more difficult to estimate future revenue of the
exchange.”

The Moscow Exchange IPO will be covered, Alexei Ulyukayev,
first deputy chairman of Russia’s central bank, said in Moscow
today. Bank Rossii is the bourse’s largest shareholder, holding
22 percent, according to the exchange’s website as of Jan. 16.

“The placement has certain specifics, this is a purely
local placement,” Ulyukayev said. “Many investors are just not
ready, they aren’t comfortable, this will be their first
placement of such a sort. But it will help the others planning
to list on this platform.”

Chinese Prospects

The Kremlin-backed Russian Direct Investment Fund is
seeking to buy as much as $100 million of stock in the
exchange’s IPO, according to a person with knowledge of the
private-equity fund’s plan, who asked not to be identified
because the information isn’t public.

RDIF are also trying to bring Chengdong Investment Corp., a
unit of Chinese sovereign wealth fund CIC International Co.,
into the IPO to buy 25 percent of the shares being offered,
three other people said. They asked not to be identified because
the information isn’t public.

The exchange set a maximum price of 63 rubles a share and
won’t accept offers of less than 55 rubles, according to the
Feb. 4 statement. It plans to use the proceeds to boost the
capital of its clearing subsidiary, the National Clearing
Center, and for information technology upgrades, according to
the statement.

Russia, the world’s largest energy exporter, is seeking to
reform the exchange’s trading systems and open up access to its
local market to lure more foreign capital to the country and
bolster the lowest stock valuations among 21 emerging markets
tracked by Bloomberg.

Opening Up

As of Feb. 7, foreign investors can buy and sell government
ruble-denominated debt known as OFZs via Euroclear Bank SA,
which operates the world’s biggest bond settlement system. The
platform will be opened to stocks from July 2014, Elena
Gusalova, the National Settlement Depository’s director of
research and development, said in November.

The bourse will move to settling trades over two days, from
the current immediate settlement, by the end of 2013, Sergey
Sinkevich, the exchange’s head of primary markets, said last
year. Russia also merged its two competing depositories Nov. 6
to bring settlement procedures in line with international norms.

The IPO will attract local investors, who “understand
their market better,” said Westman, adding that Prosperity is
still analyzing the company and mulling whether to invest in the
IPO.

Undermine Revenue

The introduction of a central depository may over time
undermine one of the exchange’s sources of revenue as it
diminishes the need for repurchase transactions since investors
no longer have to keep their money with the bourse, he said.

Prosperity’s Russia Domestic Fund, which invests in
securities issued by companies active in the local economies of
Russia and former Soviet nations, has returned 7.6 percent in
2013 and outperformed 91 percent of peers, data compiled by
Bloomberg show.

Quinn Martin, a Frontier public relations executive
representing the bourse, declined to comment on how the roadshow
is faring or on expectations about demand when contacted by
phone in Moscow yesterday.

Companies on the Micex index have an average valuation of
5.7 times estimated earnings, compared with a multiple of 15.6
for India’s BSE Sensex Index, 11.3 for Brazil’s Bovespa index
and 10.5 for China’s Shanghai Composite Index, data compiled by
Bloomberg show. Russia-domiciled companies have raised $1.91
billion in IPOs over the past 12 months, separate date show.

‘Unique Product’

“The Moscow Exchange IPO is a unique product and it makes
sense for long-term investors who can wait for further reform of
the market which will lead to more liquidity and business for
the exchange,” Ilya Kravets, director of investment research at
Daniloff Capital LLC in New York, where he helps manage $100
million of assets including Russian equities, said by phone
yesterday. “In the meantime, there are risks, particularly
risks associated with the structure of its revenue.”

BlackRock Inc., the world’s biggest asset manager, had
bought shares in the Moscow Exchange from RDIF in September, the
fund said in a statement on Sept. 28. State-controlled lender
OAO Sberbank owns 9.6 percent of the bourse, and
Vnesheconombank, Russia’s development bank, holds 8 percent,
according to the exchange’s website.